Morgan Stanley expects the euro to fall to close to parity with the dollar within months as the European Central Bank increases its easing policy to combat a faltering economy.
David Adams, head of G10 foreign exchange strategy at the bank, said in an interview that he expects the euro to fall to 1.02 against the dollar by the end of the year, a depreciation of about 7% from the current level. This basic scenario depends on the European Central Bank continuing to cut interest rates at the remaining three meetings this year, as well as the possibility of a sharp 50 basis point cut.
The bearish forecast is the most pessimistic among foreign exchange analysts surveyed by Bloomberg. Others generally expect the euro to rise to 1.11 against the dollar by the end of the year. The European Central Bank is expected to cut interest rates by 25 basis points at its meeting on Thursday, and traders are focused on the outlook for the coming months.
“There’s a lot of room for the market to refocus on the fact that the ECB could cut rates faster and harder than what the market is currently pricing in,” said Adams, who formerly worked at the New York Fed. “This week’s meeting could be a big catalyst for the market to start thinking about that.”
Foreign exchange markets are currently betting on the ECB to cut rates by about 60 basis points this year, while the Fed is pricing in a rate cut of around 110 basis points this year. London-based Adams believes there is room for traders to increase their bets on the ECB to price in a similar risk of a 50 basis point cut.
Options traders have become less optimistic about the euro's outlook ahead of the European Central Bank meeting, with the premium for holding upside exposure to the single currency next week narrowing on Monday.
Adams has been recommending short euro-dollar options positions since February because he believes the U.S. election in November could boost the dollar. Rising political uncertainty in Europe is now increasing his belief in a downtrend for the euro.
While French politics have been in the spotlight in recent months, Adams also believes that political developments in Germany are equally relevant to the region's long-term political stability.
“Political risk premiums and uncertainty are rising at a time of slowing economic growth. Both factors suggest that investors are less willing to deploy capital in the region,” he said.
The article is forwarded from: Jinshi Data